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After A Substantial Run, Financial Institutions Is Likely To Take A Breather

ALG Research profile picture
ALG Research


  • The recent share price increase is likely to hit a roadblock while credit concerns are resolved.
  • The fourth quarter showed a sizable, criticized loan increase without a matching reserve build.
  • The stock is currently at a warranted discount to peers, but trading at above tangible book value.

Investment Thesis

While most banking institutions typically consist of two parts, a holding company and bank subsidiary, Warsaw, New York-based Financial Institutions (NASDAQ:FISI) bucks the typical structure trend. FISI is actually a holding company with four different subsidiaries: Five Star Bank, SDN, Courier Capital and HNP Capital. The largest financial driver to the overall company, Five Star Bank is the retail and commercial banking unit that most people generally know and understand. SDN is the unit in which insurance products are sold. Finally, Courier Capital and HNP Capital are more focused on investment management, with a wide-ranging client list of individuals, businesses, and institutions.

With branches dotting the map in nearly every western New York town, FISI has a unique geographic footprint that should continue to drive balance sheet growth and improve financial leverage. With that being said, its recent credit woes juxtaposed against its sizable stock price increase gives me some pause to overall investment.

On a very fundamental basis, I believe FISI is operating well and generates a healthy amount of profit for shareholders. Over the long term, this bank is likely geared to continue to improve its efficiency ratio, which could spill over and generate a higher dividend payment. That being said, its recent credit deterioration (via massive, criticized loan increases) keeps me on the sidelines.

With the tangible common book value per share increasing to $23.52 in the fourth quarter, the bank currently trades at ~1.15x P/TBVPS. While this is below the peer average of 1.35x, I believe the current discount to peers is warranted given the sizable fourth quarter increase in criticized loans. While the loan loss reserve has increased, it is slightly below peer like levels. In my mind, the bank is very likely to survive, but I do believe that it is likely to face a couple of difficult quarters in order to

This article was written by

ALG Research profile picture
Passionate about the banking space and capital markets. Worked at multiple banks throughout the United States for a long time, specializing in credit and portfolio management.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (1)

@ALG Research Just a comment- I found this very difficult to read. I'm not sure if it is due to spell check overwriting, but some of the sentences were difficult to interpret. If you read it out loud to yourself, I think you'll see what I mean.
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